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MANAGING NEW PRODUCTS: IDEAS TO STRATEGY

The process of developing new products spans eight stages, each with a particular set of marketing challenges and questions to answer (see Figure 3-8). If the company cannot answer yes to the key question at each of the first six stages, the new product will be dropped; in the final two stages, the company has the option of further development or modification rather than immediately dropping the new product. This section covers the stages from idea to strategy and analysis; the following section covers the stages from product development through market testing and commercialization.

Idea Generation

The marketing concept holds that customer needs and wants are the logical place to start the search for new product ideas. Hippel has shown that the highest percentage of ideas for new industrial products originates with customers. 6 Many of the best ideas come from asking customers to describe their problems with current products. For instance, in an attempt to grab a foothold in steel wool soap pads, 3M organized consumer focus groups and asked about problems with these products. The most frequent complaint was that the pads scratched expensive cookware. This finding produced the idea for the highly successful Scotch-Brite Never Scratch soap pad. 7 In addition to customers, new-product ideas can come from many sources: scientists, competitors, employees, channel members, sales reps, top management, inventors, patent attorneys, university and commercial laboratories, industrial consultants, advertising agencies, marketing research firms, and industry publications.

Idea Screening

Once the firm has collected a number of new product ideas, the next step is to screen out the weaker ideas, because product-development costs rise substantially with each successive development stage. Most companies require new-product ideas to be described on a standard form that can be reviewed by a new-product committee. The description states the product idea, the target market, and the competition, along with a rough estimate of the market size, product price, development time and costs, manufacturing costs, and rate of return. The new-product committee then reviews each idea against criteria such as: Does the product meet a need? Would it offer superior value? Will the new product deliver the expected sales volume, sales growth, and profit? The ideas that survive this screening move on to the concept development stage.

Concept Development

A product idea is a possible product the company might offer to the market. In contrast, a product concept is an elaborated version of the idea expressed in meaningful consumer terms. A product idea can be turned into several concepts by asking: Who will use this product? What primary benefit should this product provide? When will people consume or use this product? By answering such questions, a company can often form several product concepts, select the single most promising concept, and create a product-positioning map for it. Figure 3-9 shows the positioning of a product concept, a low-cost instant breakfast drink, compared to other breakfast foods already on the market. Next, the product concept has to be turned into a brand concept. To transform the concept of a low-cost instant breakfast drink into a brand concept, the company must decide how much to charge and how calorific to make its drink. Figure 3-9 shows a brand-positioning map that reflects the positions of three instant breakfast drink brands. The gaps on this map indicate that the new brand concept would have to be distinctive in the medium-price, medium-calorie market or the high-price, high-calorie market.

Figure 3-8 The New-Product-Development Decision Process Concept Testing


Concept testing involves presenting the product concept to appropriate target consumers and getting their reactions. The concepts can be presented symbolically or physically. However, the more the tested concepts resemble the final product or experience, the more dependable concept testing is. In the past, creating physical prototypes was costly and time-consuming, but computer-aided design and manufacturing programs have changed that. Today firms can design a number of prototypes via computer and then create plastic models to obtain feedback from potential consumers. Companies are also using virtual reality to test product concepts. Many companies today use customer-driven engineering to design new products. Customer-driven engineering attaches high importance to incorporating customer preferences in the final design. National Semiconductor uses the Internet to enhance its customer-driven engineering by tracking what customers search for on its Web site. Sometimes, says the companys Web services manager, it is more important to know when a customer did not find a product than when he did. That helps National Semiconductor shrink the time needed to identify market niches and create new products.

Marketing Strategy Development

After testing and selecting a product concept for development, the new-product manager must draft a three-part preliminary marketing-strategy plan for introducing the new product into the market. The first part will describe the target markets size, structure, and behavior; the planned product positioning; and the sales, market share, and profit goals sought in the first few years. The second part will outline the planned price, distribution strategy, and marketing budget for the first year. The third part will describe the long-run sales and profit goals and marketing-mix strategy over time. This plan forms the basis for the business analysis that is conducted before management makes a final decision on the new product.

Business Analysis

In this stage, the company evaluates the proposed new products business attractiveness by preparing sales, cost, and profit projections to determine whether

these satisfy company objectives. If they do, the product concept can move to the product-development stage. Note that this cannot be a static process: As new information emerges, the business analysis must be revised and expanded accordingly.

Figure 3-9 Product and Brand Positioning


Estimating Total Sales First, management needs to estimate whether sales will be high enough to yield a satisfactory profit. Total estimated sales are the sum of estimated first-time sales, replacement sales, and repeat sales. For one-time purchased products, such as a retirement home, sales rise at the beginning, then peak, and later approach zero as the number of potential buyers is exhausted; if new buyers keep entering the market, the curve will not drop to zero. Infrequently purchased productssuch as automobiles and industrial equipmentexhibit replacement cycles that are dictated by physical wearing out or by obsolescence due to changing styles, features, and performance; sales forecasting calls for estimating first-time sales and replacement sales separately. For frequently purchased products, such as consumer and industrial nondurables like soap, the number of first-time buyers initially increases and then decreases as fewer buyers are left (assuming a fixed population). Repeat purchases occur soon, providing that the product satisfies some buyers. The sales curve eventually falls to a plateau representing a level of steady repeat-purchase volume; by this time, the product is no longer a new product. Estimating Costs and Profits After preparing the sales forecast, management should analyze expected costs and profits based on estimates prepared by the R&D, manufacturing, marketing, and finance departments. Companies can also use other financial measures to evaluate new-product proposals. The simplest is break-even analysis, in which management estimates how many units of the product the company will have to sell to break even with the given price and cost structure. The most complex method of estimating profit is risk analysis. Here, three estimates (optimistic, pessimistic, and most likely) are obtained for each uncertain variable affecting profitability under an assumed marketing environment and marketing strategy for the planning period. The computer simulates possible outcomes and computes a rate-of-return probability distribution showing the range of possible rates of returns and their probabilities.

MANAGING NEW PRODUCTS: DEVELOPMENT TO COMMERCIALIZATION

If the product concept passes the business analysis test, it moves on to be developed into a physical product. Up to now, it has existed only as a word description, drawing, or prototype. This step involves a large jump in investment that dwarfs the costs incurred in the earlier stages. If the company determines that the product idea cannot be translated into a technically and commercially feasible product, the accumulated project cost will be lostexcept for any useful information gained in the process.

Product Development
The job of translating target customer requirements into a working prototype is helped by a set of methods known as quality function deployment (QFD). This methodology takes the list of desired customer attributes (CAs) generated by market research and turns them into a list of engineering attributes (EAs) that the engineers can use. For example, customers of a proposed truck may want a certain acceleration rate (CA). Engineers turn this into the required horsepower and other engineering equivalents (EAs). QFD allows firms to measure the trade-offs and costs of satisfying customer requirements; it also improves communication among marketing, engineering, and manufacturing. Next, the firm uses QFD to develop one or more physical versions of the product concept. The goal is to find a prototype that customers believe embodies the key attributes described in the product-concept statement, that performs safely under normal use, and that can be produced within the budget. The rise of the World Wide Web has driven more rapid prototyping and more flexible development; prototypedriven firms such as Yahoo! and Microsoft cherish quick-and-dirty tests and experiments. When the prototypes are ready, they are put through rigorous functional tests and customer tests. Alpha testing means testing the product within the firm to see how it performs in different applications. After refining the prototype further, the company moves to beta testing, enlisting customers to use the prototype and give feedback on their experiences. Beta testing is most useful when the potential customers are heterogeneous, the potential applications are not fully known, several decision makers are involved in purchasing the product, and opinion leadership from early adopters is sought. Consumer testing can take a variety of forms, from bringing consumers into a laboratory to giving them samples to use in their homes. In-home placement tests are common with products ranging from ice cream flavors to new appliances. For example, when DuPont developed its new synthetic carpeting, it installed free carpeting in several homes in exchange for the homeowners willingness to report their likes and dislikes about the carpeting.

Market Testing
After management is satisfied with functional and psychological performance, the product is ready to be dressed up with a brand name and packaging, and put to a market test. The new product is now introduced into an authentic setting to learn how large the market is and how consumers and dealers react to handling, using, and repurchasing the product. For example, idealab! is in the business of launching new Internet ventures (eToys was one). Before starting CarsDirect, a Web-based car buying service, idealab! put up a live Web page and monitored on-line market reaction. In just one evening, the site sold four carsresults that hinted at the products potential for strong market acceptance. Consumer-Goods Market Testing

In testing consumer products, the company seeks to estimate four variables: trial, first repeat purchase, adoption, and purchase frequency. The company hopes to find all of these variables at high levels. In some cases, however, it will find many consumers trying the product but few rebuying it. Or it might find high permanent adoption but low purchase frequency (as with gourmet frozen foods). The major methods of consumer-goods market testing, from the least to the most costly, are:
Sales-wave research. Consumers who initially try the product at no cost are reoffered the product, or a competitors product, at slightly reduced prices, as many as three to five times (sales waves). The company notes how many customers select its product again and their reported level of satisfaction. Simulated test marketing. Up to 40 qualified buyers first answer questions about brand familiarity and product preferences. These buyers are invited to look at commercials or print ads, including one for the new product, then they are given money and brought into a store where they can make purchases. The company notes how many people buy the new brand and competing brands as a test of the ads relative effectiveness against competing ads in simulating trial. Consumers are also asked why they bought or did not buy; nonbuyers receive a free sample of the new product and are reinterviewed later to determine product attitudes, usage, satisfaction, and repurchase intention.15 Controlled test marketing. A research firm manages a panel of stores that will carry new products for a fee. The company with the new product specifies the number of stores and geographic locations it wants to test. The research firm delivers the product to the participating stores and controls shelf position; number of facings, displays, and point-of-purchase promotions; and pricing. Sales results can be measured through electronic scanners at the checkout. The company can also evaluate the impact of local advertising and promotions during this test. Test markets. When full-blown, the company chooses a few representative cities, the sales force tries to sell the trade on carrying the product and giving it good exposure, and the company unleashes a full advertising and promotion campaign in these markets. Here, marketers must decide on the number and location of test cities, length of the test, what to track, and what action to take. Today, many firms are skipping extended test marketing and relying instead on faster and more economical market-testing methods, such as smaller test areas and shorter test periods.

Business-Goods Market Testing Business goods can also benefit from market testing. Expensive industrial goods and new technologies will normally undergo both alpha and beta testing. In addition, new business products are sometimes market-tested at trade shows. Trade shows such as the annual Toy Fair and semiannual Internet World draw a large number of buyers who view many new products in a few concentrated days. The vendor can observe how much interest buyers show in the new product, how they react to various features and terms, and how many express purchase intentions or place orders. The disadvantage of trade shows is that they reveal the product to competitors; therefore, the vendor should be ready to launch the product soon after the trade show.

Commercialization
If the company goes ahead with commercialization, it will face its largest costs to date. The company will have to contract for manufacture or build or rent a full-scale manufacturing facility. Plant size will be a critical decision. The company may choose to build a smaller plant than called for by the sales forecast, to be on the safe side. Quaker Oats did this when it launched its 100 Percent Natural breakfast cereal. Unfortunately, demand so exceeded the companys sales forecast that for about a year it could not supply enough product to the stores. Although Quaker Oats was gratified with the response, the low forecast cost it a considerable amount of profit.

In addition to promotional decisions, other major decisions during this stage include:
When (timing). Marketing timing is critical. If a firm learns that a competitor is nearing the end of its development work, it can choose: first entry (being first to market, locking up key distributors and customers, and gaining reputational leadership; however, if the product is not thoroughly debugged, it can acquire a flawed image); parallel entry (launching at the same time as a rival may gain both products more attention from the market); or late entry (waiting until after a competitor has entered lets the competitor bear the cost of educating the market and may reveal problems to avoid). Where (geographic strategy). The company must decide whether to launch the new product in a single locality, a region, several regions, the national market, or the international market. Smaller companies often select one city for a blitz campaign, entering other cities one at a time; in contrast, large companies usually launch within a whole region and then move to the next region, although companies with national distribution generally launch new models nationally. Firms are increasingly rolling out new products simultaneously across the globe, which raises new challenges in coordinating activities and obtaining agreement on strategy and tactics. To whom (target-market prospects). Within the rollout markets, the company must target its initial distribution and promotion to the best prospect groups. Presumably, the company has already profiled the prime prospectswho would ideally be early adopters, heavy users, and opinion leaders who are able to be reached at a low cost.16 The company should rate the various prospect groups on these characteristics and then target the best prospect group to generate strong sales as soon as possible, motivate the sales force, and attract further prospects. How (introductory market strategy). The company must develop an action plan for introducing the new product into the rollout markets. To coordinate the many activities involved in launching a new product, management can use network planning techniques such as critical path scheduling (CPS), which uses a master chart to show the simultaneous and sequential activities that must take place to launch the product. By estimating how much time each activity takes, the planners can estimate the projects completion time. A delay in any activity on the critical path will delay the entire project. 17

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